On March 11, 2011, the Tohoku region of Japan was struck by amassive earthquake and tsunami that not only devastated a nuclearpower plant and wreaked havoc on the island, but caused massiveworldwide supply chain disruptions, pointing up the fragility ofour interconnected world. The disaster caused an estimated $35 to$40 billion in insured losses and many businesses were notadequately protected, both in terms of insurance and riskmanagement, according to the Insurance Information Institute(I.I.I.).

Our global economy puts more businesses at risk of supply chaindisruptions. These don't begin and end with natural disasters butcan include industrial accidents; labor issues (strikes,shortages); production process problems; political upheaval,including war and civil strife; trade disputes; health and safetyconcerns; credit/cash flow problems; and supplier finances orsolvency. It can take two years or more for companies to recoverfrom a supply chain failure, according to the III.

We asked risk management experts from around the industry whatthey believed were the lessons learned from the Japan quake andwhat weaknesses still remain.

Click “next” to read their responses.

Tom Teixeira, life sciences practice leader,Willis:

The main lessons learned were that there needs to be a betterunderstanding of the breadth and depth of supply chains, theinterdependencies and pinch-points and the related exposures, bothfrom a property damage and non-property damageperspective.

While this is a challenging exercise for many sectors, moreconsideration needs to be given to the use of technology andexisting data sources to provide an early understanding of wherethe exposures exist and the overall size of those exposures.

Supplier extensions CBI (contingent business interruption) thatwere taken out against property damage business interruptionpolicies did not provide enough cover for the level of businessinterruption (BI) experienced from the loss of a key supplier dueto property damage.

Companies thought they knew who their key suppliers were, butthey got it wrong. They failed to identify the “real” keysuppliers and therefore miscalculated the level of BI they wereexposed to. In many cases this meant they were not covered for theresulting BI impact. Some of these key suppliers were smallcompanies that manufactured unique electronic components that wereused across a number of product lines.

There were a number of instances where supply chain interruptioncover for non-property damage perils would have been extremelyuseful. Many suppliers, while they did not suffer from propertydamage on their premises, did not receive utilities such aspower–due to power station failure–and were therefore unable to getgoods out of their premises. However, their customers werenot insured for this type of peril. 

John Dempsey, managing partner, DempseyPartners:

According to a survey by Dempsey Partners, a forensicaccounting, claims management and risk consulting firm, 55 percentof corporate risk managers and other financial executives feel theinsurance industry needs to develop new products to help protectagainst supply chain risks. Sixty-one percent say they experiencedsuch a loss in the last five years that led to a loss of earningsbut only 30 percent recovered the losses with an insuranceclaim.

There's plenty of room for improvement in how businesses andtheir insurance companies approach business interruption,contingent BI and their overall supply chain exposures. Withrelated insurance coverages become more restrictive, businessesclearly need to examine supply chain and BI risk with greaterprecision and understand the extent and limits of the protectionafford by their insurance programs.

Oriol Gaspa Rebull, seismologist for ImpactForecasting, Aon Benfield's model development centre ofexcellence:

Tohoku highlighted the technical limitations of catastrophemodels and their ability to assess earthquake risk. This in turntriggered new collaborations between scientists and catastrophemodelers to help understand the effects of the earthquake andaddress the unexpectedly vast variety of research needed to developan enhanced catastrophe model.

Tsunami modelling, stress transfer and redistribution,time-dependent aftershock modeling and global earthquake clusteringare examples of topics that have become more pertinent since theearthquake occurred.

Impact Forecasting is focusing on the modelling of probabilisticearthquake-triggered tsunamis and the implementation oftime-dependent aftershock modelling, in collaboration with AonBenfield Research's academic partners including GFZ in Potsdam andGNS in New Zealand.

Gary Lynch, global leader, Marsh RiskConsulting's Supply Chain Risk Management Practice:

From the events of Japan and other recent events—the flooding inThailand and political unrest in the Middle East, for example—welearned that organizations can no longer simply assume anythingwhen it comes to risk management, especially when third partiessuch as suppliers or contract manufacturers are involved. We alsolearned that there is still a lack of transparency within manyorganizations' increasingly global, complex and interdependentsupply chains; beyond the first tier of suppliers, distributors,and contract manufacturers, many organizations still do not knowwho contributes to these supply chains.

Post-Japan—and exacerbated by events in Thailand and the MiddleEast, and by the global economic downturn—many organizations arestill managing through the depletion of inventories, destruction ofproduction capabilities, absence or permanent loss of key skillsand obliteration of small single or sole source suppliers. Theseorganizations are relocating, repurposing, and rethinking theconfiguration of their sourcing, production and flow of goods andservices. There will be continued economic fallout as trade flowsshift among sourcing, producing and consuming nations. But the goodnews is that organizations are now taking action to betterunderstand their risks and make their organizations moreresilient—making greater use of analytics and other metrics, andelevating catastrophic risk management to the C-suite and boardlevel.

Linda Conrad, director of strategic businessrisk management, Zurich Financial Services:

The world is more global than before, but many companies havenot adapted business processes to new emerging risks. In the lastfew years, firms have made a big effort to contain cost throughsole sourcing and maintaining thinner inventory levels. Steps takento drive cost out of the supply chain can often drive risk in.

Zurich maintains a supply chain disruption data base that weanalyze for primary cause, length, financial cost, geography andindustry that shows that physical disruption isn't even among thetop 5 causes.

The events in Japan and Thailand are causing people to revisittheir supply chain, with risk managers feeling more comfortablewith raising this risk issue with CFOs and procurement departments.The result is that, instead of just looking at cost, they're nowrecognizing the need to analyze the elements of risk and conductrisk assessments of their suppliers.

We also saw that companies aren't not looking far enough downthe supply chain and thinking about the supplier's supplier;studies show that more than 40 percent of supply chain disruptionsoccur below the top-tier supplier.